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Is Denison Mines a Buy?

Denison Mines(NYSEMKT: DNN) is working to build a new uranium mine in Canada. For investors interested in the nuclear fuel, it's an interesting stock to look at because of the material upside potential if construction plans play out as projected and uranium prices rise. But does that make it a stock worth buying? Only if you clearly understand the risks before putting your hard-saved capital into the shares. Here are some key facts you need to know before you invest here.

The good stuff

Denison's big asset is the Wheeler River project, which encompasses two potential uranium mines, Phoenix and Gryphon. In total, the company estimates that there are around 100 million pounds of uranium at the site. The two mines, meanwhile, are projected to have low operating costs. Phoenix's costs are expected to be as low as $3.33 per pound, while Gryphon is projected to have costs of around $11.70 per pound. Both are notably below the current uranium spot price of around $28 per pound.

A man standing in the mouth of a mine with the sun behind him

Image source: Getty Images.

To help it get from the drawing board to an operating mine, meanwhile, Denison has a 22.5% interest in the McClean Lake Uranium mill. So, unlike many other upstart miners, Denison actually generates some revenue to help offset the costs of developing Wheeler River. Through the first nine months of 2018, McClean brought in roughly $8.6 million.

Right now, Denison is projecting internal rates of return for the Wheeler project of between 38% and 67%, depending on future uranium prices. As for the balance sheet, it's pretty clean since Denison has no long-term debt weighing down its balance sheet. So far, Denison sounds like an interesting investment opportunity. But there's much more to understand before you buy Denison stock.

The bad news

The biggest issue to consider with Denison Mines is time. Although the Wheeler River project sounds great, construction on the first of the two mines, Phoenix, isn't projected to start until 2021. It won't start producing uranium until 2024. Construction on Gryphon isn't projected to start until 2026, with first production in 2030. Being that it's 2019, there is a long time before these assets will contribute to cash flow. And that's if everything plays out as planned, which isn't a lock when dealing with the ground-up construction of a new mine.

So, even if everything works out as hoped, Denison has years worth of expenses ahead of it. It will need to raise substantial capital to get these mines built. And, with a 90% ownership interest in the Wheeler Project, it's on the hook for most of the costs. The stake in the operating McClean Lake uranium mill is expected to help with that, but the company's operating expenses in the first nine months of 2018 were roughly $8.8 million compared to revenue of $8.6 million. The expense number's not exactly a clean one because you have to take into consideration things like depreciation, which is a non-cash expense, when you consider the benefit of the asset. But the bigger picture is that McClean Lake may help offset some mine development costs, but not a huge amount.

So, despite the benefit of the McClean Lake mill, Denison will have to tap the capital markets for capital. Historically, that has meant selling stock, like it did in late 2018, when it issued roughly 4.95 million shares to raise around $3.8 million. Every one of those new shares dilutes current shareholders. With initial capital spending for Wheeler expected to be around $320 million, Denison is going to need to issue a lot more stock to get Phoenix and Gryphon up and running. Issuing debt is another option, but it would mean taking on the weight of the associated interest expenses. Another avenue would be for Denison to find a partner, which would mean giving up some of its ownership interest in the project. Simply put, getting from the drawing board to an operating uranium mine isn't going to be easy, financially speaking.

Better options

Denison isn't a great investment choice for most investors despite the potential upside of the Wheeler River project. It is still early days, and there's a huge amount of spending that needs to be done, not to mention the inherent risks of building a mine (big projects like this don't always work out as planned once you put shovels in the ground). Only investors with very strong feelings about the uranium market and a deep understanding of this specific project should be looking here. Most investors looking at uranium would be much better off with a company likeCameco Corp.(NYSE: CCJ). This miner has operating mine assets and additional mines that are currently mothballed but that could be brought on line fairly quickly if there were enough demand. It's a similar story, but one that doesn't involve huge construction costs and risks.